06 June 2012

Investors face "return-free risk"

An article in Spiegel Online examines the problems encountered by the world's most powerful investors - not the 1% of private capital, but those responsible for investing national wealth.

The man who controls more than €450 billion ($558 billion)..., Yngve
Slyngstad is a relaxed Norwegian type... So what's it like to be one of the world's most powerful investors in
2012? "In the past, we searched for risk-free returns." He pauses for
effect. "Today we know that what we mainly have are investments with
return-free risk."

It's a common experience for the 49-year-old investor these days. His
constant challenge is to find ways to invest a lot of new money and
reinvest old money.

As head of the Norwegian sovereign-wealth fund, Slyngstad collects
his country's oil revenues, which currently total more than €100 million
-- per day. The fund is supposed to use these revenues to provide the
country with prosperity for the long term. It's no easy task, because
the government expects Slyngstad and his staff of more than 300 people
to generate a 4 percent return on investment...

Between 1999 and 2007, the Norwegian sovereign-wealth fund achieved an
average annual return of almost 6 percent, but during the last four
years it has only been about 1 percent on average...

In the week before last, the German finance minister borrowed money
for two years, without having to pay a single cent in interest. Even
investors lending the German treasury money for a decade are currently
satisfied with a premium of only 1.2 percent per year. The yields on US
Treasury bonds and Japanese debt securities are at similarly low levels.

But what is helpful to many a finance ministry is frustrating for
investors. When today's very low bond yields are adjusted for inflation,
many investors end up with negative returns. Investing money is
becoming tantamount to the destruction of assets, because there are few
investments that actually produce any returns.

Most of these players are managing the money of small investors, billions in assets with which they do not want to gamble. Instead, their objective is to invest the money so that they can eventually pay out a sizeable pension

So where does these people put the money nowadays? No details, but some discussion at Spiegel Online.

1 comment:

I hate to be Debbie Downer, but anyone living on a pension is currently living in a dream world where they're temporarily insulated from the low returns that pension funds are generating lately. San Jose and San Diego reformed their public employee pension funds yesterday. Numerous entities (like the states of California and Illinois) are going to have pension reform thrust upon them (when the choice comes to shut down prisons and let the prisoners go and stop giving out free anti-psychotic meds or cut off their pensioners, which way do you think they'll go?)

The low interest rates currently available are a tax on savers put in place for the immediate benefit of the banks (and the down-the-road salvation of our economic system, so live with it). It also does wonders for the federal deficit since they can finance our $15 trillion national debt for peanuts. But, eventually it will have to change and I expect much higher interest rates, raging inflation, collapsing home prices and the Cubs winning the World Series. This fits in nicely with my guiding investment philosophy which is that the Baby Boom is much too large to support in retirement and hence it will need to be bankrupted to force its members to work until they drop. Eliminating defined benefit pension plans was the first step.

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